Working Paper: NBER ID: w18126
Authors: Emilie Caldeira; Martial Foucault; Grégoire Rotagraziosi
Abstract: Decentralization has been put forward as a powerful tool to reduce poverty and improve governance in Africa. The aim of this paper is to study the existence, and identify the nature, of spillovers resulting from local expenditure policies. These spillovers impact the efficiency of decentralization. We develop a two-jurisdiction model of public expenditure, which differs from existing literature by capturing the extreme poverty of some local governments in developing countries through a generalized notion of the Nash equilibrium, namely, the constrained Nash equilibrium. We show how and under which conditions spillovers among jurisdictions induce strategic behaviours from local officials. By estimating a spatial lag model for a panel data analysis of the 77 communes in Benin from 2002 to 2008, our empirical analysis establishes the existence of the strategic complementarity of jurisdictions' public spending. Thus, any increase in the local public provision in one jurisdiction should induce a similar variation among the neighbouring jurisdictions. This result raises the issue of coordination among local governments, and more broadly, it questions the effeciency of decentralisation in developing countries in line with Oates' theorem.
Keywords: Decentralization; Local Governments; Public Spending; Benin
JEL Codes: D72; H2; H7
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Local public spending in one jurisdiction (H70) | Local public spending in neighboring jurisdictions (H73) |
| Local public spending in neighboring jurisdictions (H73) | Local public spending in one jurisdiction (H70) |
| Local fiscal resources (H79) | Strategic interactions among local governments (H73) |
| Ethnic composition similarity (J15) | Strategic interactions among local governments (H73) |